{"id":64501,"date":"2017-07-13T01:51:26","date_gmt":"2017-07-12T23:51:26","guid":{"rendered":"http:\/\/beta.next-finance.net\/1-interview\/aude-lerivrain-can-we-invest-in-the-chinese-banking-sector-without-worries\/"},"modified":"2019-12-31T02:03:00","modified_gmt":"2019-12-31T01:03:00","slug":"aude-lerivrain-can-we-invest-in-the-chinese-banking-sector-without-worries","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/1-interview\/aude-lerivrain-can-we-invest-in-the-chinese-banking-sector-without-worries\/","title":{"rendered":"Aude Lerivrain : \u00ab Can we invest in the chinese banking sector without worries? \u00bb"},"content":{"rendered":"

WHY LOOK INTO CHINESE BANKS TODAY?<\/strong><\/p>\n

Aude Lerivrain:<\/strong> Chinese banking issuers are increasingly present on
\ninternational bond markets. That\u2019s why we decided to
\nlook into the health of the Chinese banking sector, which
\nis at the heart of this economy in full flux.<\/p>\n

To get a good idea of the workings of this complex system
\nwe need to look back at the uniqueness of its
\ndevelopment. The banking system was a monopoly and
\nhardly existed at all before 1978. It was recast from the
\nground up by Deng Xiaoping\u2019s reforms and opening up of
\nthe economy, with the establishment of four state banks,
\neach enjoying a monopoly in a specific area, i.e.,
\ninfrastructure, industry, foreign trade and agriculture. The
\nCommercial Bank Law of 1995 eliminated this monopoly
\nfor state banks and expanded the system with the
\ncreation of three policy banks in charge of assisting the
\ndevelopment of certain sectors without a profitability
\nobjective and the creation of public-private banks and
\nlocal banks. This raised the number of banks from five to
\nmore than 30,000 in 20 years. Bank assets quintupled in
\n10 years to 232 trillion renminbi in 2016 (about 32 trillion
\neuros), and four Chinese banks are now classified as GSIBs
\n(Global Systemically Important Banks). This
\nbreakneck growth was driven by the fact that the
\ngovernment at first counted on the banks and not the
\nfinancial markets to finance China\u2019s development. It is
\nnow turning towards market financing on both its
\ndomestic market and internationally.<\/p>\n

ARE THE CHINESE BANKING SYSTEMS\u2019 WELL-KNOWN
\nWEAKNESSS DUE TO ITS HISTORY?<\/strong><\/p>\n

Aude Lerivrain:<\/strong> It is quite right that Chinese banks\u2019 structural weaknesses
\nare due to the structure and development of the Chinese
\neconomy. The \u201call state and administered\u201d model with its
\nimplicit state guarantee at all levels has not urged banks
\nto develop a culture of risk and fair price. <\/p>\n

\"total_assets_and_liabilities_of_banking_institutions.jpg\"<\/a><\/p>\n

WHATS THE POINT OF REVIEWING A LOAN PORTFOLIO IF
\nTHE COMPANY IS PUBLIC AND IF THE STATE IS THE
\nGUARANTOR OF LAST RESORT?<\/strong><\/p>\n

Aude Lerivrain:<\/strong> This phenomenon has been made even worse by the
\nreliability of the legal framework and reporting,
\ncorruption, and the proper economic functioning of
\npublicly owned companies (including \u201czombie
\ncompanies\u201d and \u201cliving dead public-sector groups\u201d the
\nbanking regulator talks about). Coming on top of the
\nexplosion in outstanding loans and the cyclical nature of
\nthe Chinese economy, no wonder non-performing loans
\nskyrocketed. The Chinese state has taken on this problem
\nmany times in the past with the creation of defeasance
\nstructures, but this is still an issue, as the flow of nonperforming
\nloans continues, in particular in city
\ncommercial banks and credit cooperatives!<\/p>\n

Another risk factor to keep an eye on is shadow banking.
\nIn recent years banks have developed off-balance-sheet
\nactivities in order to get around regulations that hemmed
\nin their growth. With their frightening amount of offbalance-sheet
\nassets (more than 20 trillion renminbi),
\nwealth management products, which are bank deposit
\nsubstitutes, are the main concern, as they are still implied
\nliabilities for banks, given that they are targeted to retail
\ncustomers but with no offsetting capital. They are
\ninvested in assets that traditionally are riskier than
\nbalance sheet assets and carry short maturities and need
\nto be rolled over very often. So Chinese banks could begin
\nto face liquidity issues, whereas financing via domestic
\ncustomer deposits was one its main strengths and
\nseemed to rule out any liquidity risk.<\/p>\n

In short, we are seeing in the Chinese banking system
\nmany of the early warning signs of the major banking
\ncrises of recent years (in the US, Ireland and Spain). Is a
\nsoft landing of the Chinese financial system possible?
\nSeems unlikely without state support!<\/p>\n

IN THAT CASE WHY TAKE THE RISK OF INVESTING?<\/strong><\/p>\n

Aude Lerivrain:<\/strong> The state is ubiquitous in China. Banks are state-run; they
\nlend to public-sector companies; and investors authorise
\ninvestments, while assuming that the state will serve as a
\nlast resort. So confidence in the Chinese government to
\ncontrol leverage in the financial system, manage
\neconomic growth and overheating in certain sectors is
\ncrucial. And the government\u2019s will to do so in this area is
\nbeyond a doubt! Especially as it can rely on the strengths
\nof its economy, including abundant domestic savings,
\nvery heavy fiscal resources, and little dependence on
\nforeign investors. But is this argument enough for
\ninvesting in Chinese banking groups?